A new income-averaging option is one of the most significant changes to the low-income housing tax credit (LIHTC) program in years.
The Consolidated Appropriations Act of 2018 established income averaging as a third minimum set-aside election. Income averaging allows LIHTC-qualified units to serve households earning as much as 80% of the area median income (AMI) as long as the average income limit at the property is no more than 60% of the AMI. A project using the income-averaging option must make at least 40% of its units affordable to eligible households.
“Income averaging potentially provides additional tax credit equity to developments that would not otherwise generate tax credits,” says Matthew Rieger, president and CEO of the Housing Trust Group, a Miami-based developer and owner of multifamily housing. “This allows for the construction of communities that would otherwise not be viable.”
Previously, housing credit units were restricted to households earning no more than 60% of the AMI. The prior minimum set-asides called for having 20% of the units targeted to no more than 50% of the AMI or 40% of the units at no more than 60% of the AMI, and these options remain part of the federal program.
Income averaging is seen as a way to expand the program to serve more families. Before, families earning 80% of the AMI did not qualify for a LIHTC home and were likely living in market-rate housing, where they were spending a large portion of their incomes on rent.
Income averaging could also help make more properties financially feasible and allow for deeper income targeting. Under the new option, the higher rents that households at the upper range could pay would have the potential to offset the lower rents for extremely low- and very low-income households.
Income averaging applies to the designated income/rent levels of the units, not the incomes of individual tenant households. Under income averaging, unit designations may only be set at 10% increments beginning at 20% of the AMI; thus, the allowable income/rent designation levels are 20%, 30%, 40%, 50%, 60%, 70%, and 80% of the AMI.
It does not appear that states have to allow income averaging as part of their programs, according to a recent document produced by the National Council of State Housing Agencies (NCSHA).
However, several states have made moves to begin implementing the option. Here are what several states are doing:
The California Tax Credit Allocation Committee (TCAC) recently adopted emergency regulations, which immediately allow applicants to propose new projects with the income-averaging option. “The one caveat is that projects maintain TCAC’s long-standing requirement to achieve 50% average AMI for 9% projects and 59% average AMI for 4% projects,” says Mark Stivers, TCAC executive director, noting that TCAC has received its first 4% income-averaging application.
For developments with existing LITHC reservations, the emergency regulations allow only a very limited universe of these projects to convert to income averaging. Conversion is only allowed in order to accommodate over-income tenants in rehabilitation projects or to increase the number of tax credit units. Projects must not have executed their regulatory agreement yet, must achieve the average AMI requirements, and must obtain the executive director’s approval. TCAC also intends to make approval conditioned on the project electing “yes” on line 8b of the 8609 form so that the income averaging applies to the project as a whole rather than per building.
The income-averaging option will likely be most beneficial to rehabilitation projects, with some existing tenants earning between 60% and 80% of the AMI, says Stivers.
In the past, these tenants either were relocated, or the project had to reduce its applicable fraction and lose equity. Now, these projects can maintain the existing tenants in tax credit units. TCAC officials believe that income averaging also will give developers greater flexibility in terms of income targeting. In higher rent markets where 70% and 80% AMI rents can be achieved, projects will be able to choose to serve a greater income mix of tenants, and if so, residents between 60% and 80% of the AMI will be eligible for affordable housing.
The Ohio Housing Finance Agency (OHFA) has released a draft 2019 QAP that incorporates the income-averaging option.
Under the draft, income averaging will be permitted if all residential units are designated affordable low income. Projects using the option may not contain unrestricted or market-rate units unless condominimized out. Manager units are not subject to the restriction.
The draft also states that 100% of the units must be affordable to and occupied by persons earning 80% of the AMI or less. At least 50% of all units must be affordable to and occupied by persons earning 60% of the AMI or less.
Even before the new option, OHFA has a history of LIHTC properties with strong income gradation, says Carlie J. Boos, OHFA program and policy manager. For example, there may be developments with a mix of units at 30%, 40%, 50%, and 60% of the AMI as well as those that incorporate market-rate apartments.Income averaging is going to allow OHFA and other LIHTC allocation agencies to go further up that income ladder.
“We’re excited about how this is going to benefit our residents,” Boos says. “I think we’re going to see more opportunities to do 4% deals that weren’t possible before, more development success in rural areas, and more opportunities in preservation, where we’ve had challenges with income recertification of existing residents who are slightly over the income requirement. Now, we’re going to be able to continue to serve them.”
The income-averaging option could benefit 4% credit and tax-exempt bond deals because the higher rents will allow a development to generate more debt and equity, explains Kelan Craig, director of Planning, Preservation, and Development at OHFA.
OHFA, which recently awarded its 2018 credits, is considering allowing these deals to make the income-averaging election, but they would be required to submit an updated market study and revised equity and debt commitment letters that acknowledge the new rent structuring, Craig says.
OHFA leaders hope to have a final 2019 QAP around August.
At this time, the Wisconsin Housing and Economic Development Authority (WHEDA) is allowing income averaging to be used on 4% LIHTC deals that are 100% affordable.
The income-averaging option comes at the same time that Wisconsin has created a state LIHTC program that can be coupled with the 4% federal credit. Officials hope the new state credit will lead to the agency doing more tax-exempt bond transactions and the creation of 1,000 or more units a year. The addition of the income-averaging option gives developers even more flexibility.
“It widens the population of folks who can rent in our buildings,” says Sean O’ Brien, director of commercial lending at WHEDA. “It allows us to use the resource to dig a little deeper into affordability on the household income side.”
The state recently amended its 2018 QAP to incorporate the new state housing credit. At the same time, it incorporated the use of income averaging in 100% affordable 4% deals into the allocation plan. The deadline for state credit applications is at the end of June.WHEDA has also included the changes in its draft 2019-2020 QAP.
The agency may consider expanding the income-averaging option to the 9% LIHTC program later on, but at this point the option’s use will be focused on the 4% credit, according to O’Brien.
HFAs are hoping to get more clarification on several issues, including the “next-available-unit rule.” Complying with the rule looks to be straightforward when developments are 100% affordable, but complications could arise at developments electing to use the new income-averaging option.
In general, the rule has allowed a family to remain in its LIHTC home even when its income increases beyond 140% of the maximum allowable limits. However, the next available market-rate unit at the development must be converted to a LIHTC unit.
HFAs are still looking for guidance on how the next-available-unit rule would apply at an income-averaging development, including what happens when tenants in multiple LIHTC units at different designations go over income at the same time. If the next available unit is a market-rate unit, what designation is filled first?
New York State Homes and Community Renewal (HCR) has not yet adopted any rules or allowed any projects to close with income averaging. However, the agency is working with its local partners to assess how it can best implement the policy.
HCR leaders say they are planning to use the option for both 4% and 9% credits.
"We are examining every tool available to ensure we are providing the greatest access possible as we deliver governor Andrew M. Cuomo’s unprecedented $20 billion, five-year plan to build more than 100,000 affordable homes across New York state,” says commissioner RuthAnne Visnauskas. “This includes income averaging, which will help strengthen our fight against homelessness by making applicable affordable housing developments accessible to a range of middle-income and very low-income households.”
In a recent notice, the Iowa Finance Authority said it has determined not to allow income averaging for LIHTC projects awarded credits prior to the 2019 round.
In a June draft of its GOAL (Greater Opportunities for Affordable Living Program) plan, the Alaska Housing Finance Corp. said income averaging will not be allowed for LIHTC projects. Projects must comply with either the 20/50 or 40/60 rule.
What finance partners say
The income-averaging option will also be new for LIHTC investors and lenders.
“Income averaging will be helpful to developers and residents in several ways, such as by expanding the number of 60% to 80% units, while at the same time increasing the number of deeply affordable units,” says Maria Barry, national community development executive at Bank of America Merrill Lynch. “Income averaging also helps make possible a more diverse mix of tenants relative to their income levels.”
A major LIHTC investor and affordable housing lender, the bank expects to approach the new option much the same way as it has with its previous LIHTC developments.
“As with all of our underwriting, we will evaluate the market to ensure there is sufficient demand for the units at both the upper and the lower income levels,” Barry says.
The new option will allow LIHTC properties to broaden the population that it serves, agrees Rob Likes, national manager of KeyBank Community Development Lending & Investment.
At an income-averaging property, developers may be able to subsidize lower-income units and residents by having other units at the 80% level. “There’s the benefit to target deeper into the lower-income populations, which there’s clearly a very large need for that,” Likes says.
He expects KeyBank’s overall approach to investing in LIHTC to remain the same. However, with any new program, issues may pop up. “There may be a higher level of compliance going forward because it’s another option that involves a greater mix of incomes,” Likes says.
Michael Lavine, executive vice president and head of the tax credit equity team at Wells Fargo, also does not expect any big changes to how his group will look at deals. “We will have to take a slightly broader view in underwriting and re-examine our processes around compliance and tenant file audits to reflect the new rules, but these should be very modest adjustments,” he says.
Lavine also points to possible compliance issues.
“At this point my only concern is about the additional complexity and the related possibility of compliance missteps,” he says. “But it’s early. I’m interested to see how the states will implement the new rules.”